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The City of New York filed a breach of contract claim against an architect (Perkins Eastman) that was under contract to the Dormitory Authority of the State of New York (DASNY), claiming it was an intended third party beneficiary of that contract. The state Court of Appeals held that the city was not an third party beneficiary, and its negligence claim was duplicative of its breach of contract claim and must be dismissed. It also found there was no duty of care to perform in accordance with professional standards that was independent of its contractual obligations to its actual client. Dormitory Auth. of the State of N.Y. v Samson Constr. Co. 2018 NY Slip Op 01115 Decided on February 15, 2018 Court of Appeals.

The court noted that under a separate contract between DASNY and its construction contractor, the City of New York was expressly made a third party beneficiary. In contrast, there was no similar provision in the design professional contract.

The design professional contract provided that Perkins would “indemnify and hold harmless” DASNY and the “Client” (that is, OCME, and the NYC Police and Fire Departments) from any claims arising out of Perkins’ negligent acts or omissions and that extra costs or expenses incurred by DASNY and the Client as a result of Perkins’ “design errors or omissions shall be recoverable from [Perkins] and/or its Professional Liability Insurance carrier.”

The court stated, “Although there are passing references to the Client in the Perkins Contract, no analogous language providing that the City is an intended third-party beneficiary appears there.”

The breach of contract claim alleges that Perkins breached the contract by “failing to provide adequate designs for the Project, by failing to properly supervise the subcontractors and subconsultants that it retained with regard to the Project, by failing to monitor the progress of the Work to ensure that it was being completed properly and in substantial compliance with the design recommendations, specifications and their intent, by failing to ascertain the actual field conditions, including the subsurface conditions at the Site and the foundations beneath [the C & ]D Building and by failing to advise DASNY of the risks to the [C & ]D Building posed by the installation of the [excavation support system] and taking precautions against such risks.”

The court stated that, “The allegations set forth in the negligence cause of action are virtually identical in every respect, but with an introductory phrase that references Perkins’ failure ‘to comply with professional standards of care’ instead of breach of contract.”

Intended Third Party Beneficiary Claim

The court explained that it has previously sanctioned a third party’s right to enforce a contract in two situations: when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was “an intent to permit enforcement by the third party”.

With respect to construction contracts, the court stated, “We have generally required express contractual language stating that the contracting parties intended to benefit a third party by permitting that third party ‘to enforce [a promisee’s] contract with another.’ In the absence of express language, ‘[s]uch third parties are generally considered mere incidental beneficiaries’ (citation omitted). This rule reflects the particular nature of construction contracts and the fact that — as is the case here — there are often several contracts between various entities, with performance ultimately benefitting all of the entities involved.”

Although the performance of a construction-related contract may benefit a third-party end-user such as the City of New York, that does not in itself establish enforcement rights in that third party.

Duplicative Negligence Claim

The court provided an excellent analysis and explanation of the distinction and interplay between breach of contract and tort actions. It stated, “It is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated…. Where the damages alleged ‘were clearly within the contemplation of the written agreement . . . [m]erely charging a breach of a duty of due care,’ employing language familiar to tort law, does not, without more, transform a simple breach of contract into a tort claim.”

“To determine whether a tort claim lies, we have also evaluated the nature of the injury, how the injury occurred and the harm it caused (see 79 NY2d at 552). However, we have made clear that “where plaintiff is essentially seeking enforcement of the bargain, the action should proceed under a contract theory”

Here, the court explained that the only damages alleged under either theory of recovery are the additional expenses required to complete the project, including the costs to repair the damage to adjacent structures. “Significantly, in the contract itself, the parties contemplated Perkins’ responsibility for additional costs or expenses incurred by DASNY or the Client (in effect, the City) as a result of the architect’s design errors or omissions, and addressed it in the contract terms.”

“Clearly, there are circumstances where a professional architect may be subject to a tort claim for failure to exercise due care in the performance of contractual obligations. In seeking to “disentangl[e] tort and contract claims,” we focused in Sommer both on potential catastrophic consequences of a failure to exercise due care and on the nature of the injury, the manner in which it occurred, and the resulting harm. We distinguished between the situation where the harm was an “abrupt, cataclysmic occurrence” not contemplated by the contracting parties and one where the plaintiff was essentially seeking enforcement of contract rights.

Here, the C & D building settled during the course of several months, damaging adjacent structures. However, even if any “abrupt” or “catastrophic” consequences either could have or did result from Perkins’ alleged negligence, the fact remains that the only damages alleged appear to have been within the contemplation of the parties under the contract — and, indeed, as set forth above, are identical for both claims.

Put another way, there was no injury alleged here that a separate negligence claim would include that is not already encompassed in DASNY’s contract claim. In these circumstances, DASNY ‘is essentially seeking enforcement of the bargain, [and] the action should proceed under a contract theory.’”

Thus, we hold that the negligence claim is duplicative of the breach of contract cause of action and Perkins’ motion for summary judgment to dismiss that cause of action should have been granted.”

Comment: In order to prevent claims like this one by an entity asserting that it was an intended third party beneficiary, design professionals and contractors are well advised to include a clause in their contract expressly stating that there are no third party beneficiaries of the contract. If it is contemplated that there will, in fact, be a third party beneficiary, then a clause can be included in the contract to identify that particular entity as a third party beneficiary and then state that there are no other third party beneficiaries.

The negligence count was dismissed by the court, as explained by the decision, because the design professional owed no independent duty of care to the City with regard to the economic losses claimed, and the appropriate avenue of recovery was limited to breach of contract actions which could be brought only by the design professional’s client. It is interesting to note that DASNY, as the client of the design professional would also be limited to only a breach of contract claim against that design professional and could not add a negligence count for the same damages arising out of the alleged negligent actions that caused the breach of contract.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 21, No. 3 (Mar 2019).

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